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Randy Meinke, Vice President
Kerry Linda Martin, Account Manager
Cost-Effective and On-Time
Finance Solutions
Utility Management Challenges Finance Source Comparison Leasing - A Closer Look
Overview
Tight Government Budgets
Many Projects Compete for Same Dollar
Payback Period Requirements are High
Demand on Capital Severe
Covenants Dictate Sources/Structures Available
IOU Strives to Maximize Shareholder Value
City Seeks Alternatives to Raising Rates and Taxes
Financial Challenges
Budget Cycles and Delays Need Solution Immediately…
Waiting for Next Round of Bond Financing Payoff or Return on Investment Is Multi-Year Project Cost Are Up-Front and Significant Cost Justification With Large Up-Front
Investment Is Easier
Operational Challenges
Grants Not Readily Available
AMR Projects May Not Be Voter or
High-Level-Board Friendly
Difficult to Raise Rates, Taxes, or Issue Bonds
Weak Economy Leads to Lower Revenues,
Higher Expenses, and Lower Profit Margins
Each Project Needs to Financially Justify Itself
Political and Other Challenges
Which Came First…
Chicken or the Egg
Problem Summary
Which Came First….
Investment in Meters or Revenues/Savings
Solutions to Challenges Through Financing
Overcomes Financial Operating Political
Challenges
Why Financing?
Get What You Need Now Realize Savings Early Install Full Projects Match Revenue to Returns/Savings Better Capital Use and Leverage Preserve Cash for Emergencies
Why Financing?
Overcoming Challenges
Operating
Roll-out Faster, See Early Savings
Pay Project Expenses From Operating Budgets
Financial
Improve Project ROI
Preserve Capital for Competing Projects
Political
Seek Approval For Monthly Payment Rather Than Lump Sum
Do Not Raise Taxes
Bond Financing Long Term --Large Scale Multi-Project or Multi-Asset-based
Bank Financing Short Term Working Capital Orientation Covenants-Controls-Cost-Complacency
Lease Financing Short to Mid-range Terms Single Asset-Based
Comparison of Finance Sources
BOND: A long-term certificate of indebtedness for a specified amount of interest, with the
debt repaid at maturity.
Documentation: Multiple agreements - multiple parties
Legal Approval: Frequently requires voter or board approval
Parties: Issuer, Trustee, Investor, Consultant, Rating Agency, Insurance, etc., and Legal
Counsel
Investors: Many; primarily pension funds and insurers
Timing: 6-9 Months+ Expect Delays
Term: 5-10-20 years or longer
Bond Financing
Rates: Low. Current Coupon Average in CA is 4.129% for Tax Exempt Bonds
Fees: 2-4% of Bond - Underwriting, Consulting, Legal, Marketing, etc. Credit Enhancement Costs
Collateral: Based on all assets or on revenues pledge.
Credit Enhancements: Rating Insurance, % of Revenues
Additional Funding: Apply for new bond, same process with new underwriting expenses
Bond Financing
Parties to a BOND
BOND
Trustees
Investors
Rating Agency
& Analysts
Bond Insurance
Firm
Underwriters/Investment
BankersConsultants
Bond Counsel
Vendors
Issuer
BANK LINE: Bank’s annual commitment to make loans to the borrower up to a specified amount
during a specific period, usually one year typically used for working capital.
Documentation: Agreement contains various covenants, such as compensating balances, revenue/income, net worth, capital expenditures, leverage/operating ratios
Parties: Bank, Borrower, and Legal Counsel
Investors: Bank
Timing: Days to months, based on negotiation time.
Term: Multiple years, annual review/renegotiation
Bank Financing
Rates: Variable, based on spread over Prime (currently 4%) or LIBOR
Fees: Non-utilization, administrative, out of covenant
Collateral: Blanket Lien on business assets, including revenues, goodwill, etc.
Credit Enhancements: None; terms of bank line may be suspended or adjusted if change in performance
Additional Funding: Request extension of more credit; typically granted based on
relationship with bank; equipment/related fundings may decrease availability of line.
Bank Financing
LEASE: Contract granting use of equipment or property for a specified time in
exchange for rental payment; frequently includes a purchase option
Documentation: Lease Agreement, Schedule, Exhibits
Parties: Lessor, Lessee (Borrower), and Legal Counsel
Investors: Lessor
Timing: Days to weeks, depending on negotiation time
Term: 2 - 10 years most common
Lease Financing
Rates: Fixed, based on Treasury (currently 1.918% 3 years)
Fees: None - Rental Payments include interest cost
Collateral: Equipment/Project only
Credit Enhancements: Not common; poor credit condition may require additional
enhancement
Additional Funding: Additional Lease Schedule which defines next round of funding.
Lessorwill consider current financial conditionof Lessee
Lease Financing
Parties to a Lease
Vendor
Lessor Lessee (and legal
counsel)
Cash: Supplement Bank Line and Cash Surplus For
Other Projects Working Capital- Cash Not Tied up in Meters
or Software Immediate Positive Cash Flow--Monthly
Payments Based Only On Amount of Meters/System Installed
Benefits of Lease Financing
BUDGET: Shorten Long-term Roll Out With Same
Budget Dollars, and See More Immediate Benefits
Alternative for When Project Exceeds Budget Incorporate More Wish List Projects Into
Same Budget Move Project From Capital Budget to
Operating Expense Budget
Benefits of Lease Financing
BUDGET: Operating - Day to Day Expenses Including
Labor, Supplies, Maintenance, Leases, and Expendables
Capital - Equipment
APPROVALS: Operating - Usually Department Managers Capital - Senior Finance Staff/CFO Level
Benefits of Lease Financing
PROJECT: Improve Project ROI - See Quicker Payback Eliminates Performance Bond Requirement;
Lower Overall Project Cost Receive Discounts From Vendors With More
Timely Payments From Lease Partner
Benefits of Lease Financing
Rates: Fixed, Based on Treasury (Currently 1.918% 3 Years)
Fees: None - Rental Payments Include Interest Cost
Collateral: Equipment/project Only
Credit Enhancements: Not Common; Poor Credit Condition May Require Additional Enhancement
Additional Funding: Master Lease Agreements forFollow on Funding for Upgrades and Other Projects Are Common.
Lessor Reviews Lessee Credit Situation.
Benefits of Lease Financing
What Do Utilities Lease?
Meters and AMR Systems
Consulting Costs
Software--Billing, CRM and Other
Office Equipment
Field/Operations Equipment
Land, Buildings, Facilities
Production Facilities
Comparing Cost of Lease vs Bonds
Leasing Bonds Documentation: Easy ComplicatedTiming: 7-30 Days 6-9 Months Rates: Fixed, Low Fixed, Low Fees: None ManyCredit Enhancements: Infrequent Common Parties: 3 Many, >7Investors: Lessor Many Additional Funding:Easy Schedule New Issue/None
Comparing Lease vs Bonds
Lease Is 2-3 Page Agreement Vs.
Bond Indenture Agreement in 100’s
Project: $1,000,000 AMR Project
Year 1 investment with Bond 2% Fee $20,000 4% Annual Interest Payment $40,000
Total 10 year Bond Investment $1,420,000.00
Year 1 Lease with 4% Interest $160,201.55
Total 7 year Lease Investment $1,121.410.85
Lease vs. Bond
Budget Required with Financing Options
Expense - Budget Required Through Financing
-
200,000.00
400,000.00
600,000.00
800,000.00
1,000,000.00
1,200,000.00
1
Year
Ex
pe
ns
e
Lease
Bond
Bank
Cash
Labor Reductions over AMR Life
= Term of Lease
Operating Cost Reductions are Roughly Equal to Lease Payments
Leasing Matches Savings
Save as You Go Pay as you Go
Easy to Justify in Budget Match Expense to Income/Savings Politically Viable
Save as You Go
Examples: Shrinkage/Theft Reduction Collections Improvement Off Timing Cycle Meter Reads Billing and Accounting Error Reduction
All Small Incremental Savings Similar to Lease Payments
Cash Flow--AMR Savings
Project Size(s) Savings Match Lease Terms Useful life of Technology Flexibility of Structure To Match
Payback Simplicity--Availability
Conclusion - Technology Projects
Fit Typical Lease Terms
Conclusion
Financing Keeps Cash Funds and Budget Dollars Available for Other Projects or Unforeseen Events
Financing Improves the Project Economic Impact
Bond Financing Fits Long Term, Large Scale Projects
Contact Utility Finance Group
Contact: Mr. Randy Meinke, Vice President
CalFirst Leasing Corporation
Telephone: 800-496-4640 x 659
E-mail: [email protected]
Contact: Ms. Kerry Linda Martin, Vendor Relations Manager
Utility Finance Group
Telephone: 800-496-4640 x 677
E-mail: [email protected]
Call or Visit Us at Booth #402 For More Information
